Going Green Pays Off

If you made energy-efficient home improvements last year, such as installing insulation or replacing exterior doors and windows in your primary residence, you probably smiled all winter long as brutal storms battered much of the country. But now you get an added bonus: You can share the cost of those upgrades with Uncle Sam when you file your 2010 tax return.

The home energy credit allows you to claim a tax credit equal to 30% of the cost of making energy-efficient home improvements, up to a maximum of $1,500. So if you spent at least $5,000 in 2010, you can get the full value of the credit. (A tax credit, which reduces the amount of tax you owe, is more valuable than a tax deduction, which merely reduces the amount of income subject to tax.) The $1,500 maximum credit is a lifetime amount that applies to 2009 and 2010 combined. So if you claimed a $1,000 residential energy tax credit on your 2009 return, and you made additional home improvements last year, you can claim a credit of only $500 when you file your 2010 tax return. If you claimed the full $1,500 credit on your 2009 return, you are not eligible for the tax credit in 2010.

In addition to windows, doors, skylights and insulation, the home energy credit also applies to super-efficient central air-conditioning units, heat pumps, furnaces and water heaters. And you don’t have to itemize to claim the credit.. Just fill out Form 5695. Anyone can claim it, regardless of income.

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Even taxpayers subject to the alternative minimum tax (AMT), an alternative tax system that disallows many deductions and credits, can claim the home energy tax credit on their 2010 returns. And if you didn’t get around to a home-improvement project last year, you still have time to cash in on a smaller credit in 2011. It’s worth 10% of the cost of your project, up to $500 (and only $200 can be allocated to windows and skylights). The $500 amount must be reduced by any previous home energy credits that were available in 2006, 2007, 2009 and 2010.

Alternative energy

Homeowners who installed renewable-energy devices qualify for an even bigger tax break: 30% of the cost, with no maximum. (The previous $2,000 cap on the tax credit has been repealed.) Qualifying improvements include geothermal heat pumps, solar-powered water heaters, solar panels, fuel cells and small wind-energy systems (see www.energytaxincentives.org for details). The equipment can be installed in new or existing homes.

To claim the credit on your 2010 tax return, you must have installed the equipment by December 31, 2010. But if you didn’t, there’s still plenty of time to cash in on this tax break, which is available through 2016. To qualify for the credit, no part of the system can be used to heat a swimming pool or hot tub.

If you installed both energy-efficient improvements and a renewable-energy device last year, you can claim both tax credits on your 2010 return.